Mamata L4 P0 Monetary Policy

8/12/2019 Mamata L4 P0 Monetary Policy

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Apr-04-2014 Monetary policy theory

Monetary policy current: Urjit Patel Banking sector theory: Evolution Bank vs NBFC

Banking sector current: New bank licenses;Mahila Bank


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Financial intermediaries Barter => Double coincidence of wants Money => circular flow of income Financial intermediaries

Banking institutions Non-banking institutions


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Quantitative/ General/Indirect

1. Reserve Ratios2. OMO: Open market op.3. Policy Rate=> inflation,

deflation

1. Margin / LTV2. Consumer Credit contro

Downpayment3. Rationing4. Moral Suasion

5. Direct Action

Monetary Policy: Instruments?Qualitative/Selective/D


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Nationalization: high reserve ratio

Deposit Examples

Time Deposit FDRD

Demand Deposit CASA

Net Demand and TimeLiabilities (NDTL)

+100 cr.

NBFC cannot accept DeDeposit CRR, SLR computed on


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Nationalization: high reserve ratio: CRR

Deposit Examples

Time Deposit FDRD

Demand Deposit CASA

Net Demand andTime Liabilities(NDTL)

+100 cr.

Reserve

CRR (min 3%) (-) 15 [no profit]

Cash Reserve Ratio Both sch. & non Penalty No profit. Except 1999. Right now 4%


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Nationalization: high reserve ratio SLR

Deposit Examples

Time Deposit FDRD

Demand Deposit CASA


+100 cr.

Reserve


SLR (min 25%) (-) 40 [some profit]

Money left with bank =45

Statutory liquidity Ratio All banks (sch, Non-sch.) Cash, gold, RBI approved

securities Right now 23%


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Nationalization: high reserve ratio (PSL)

Deposit Examples

Time Deposit FDRD

Demand Deposit CASA


+100 cr.

Reserve


SLR (min 25%) (-) 40 [some profit]

Money left with bank =45

PSL (40%) =45 x 0.4=18

Left for normal borrowers =45-18=27 cr.

Priority sector lending 40% of net credit Yearly jain


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Inflation (upward price Movement)

RBI raises SLR, CRR Bank have less money left. People can borrow less Low output

Low employment Low income Low demand Low price level

RBI decreases SLR, CRR Banks are left with more People can borrow more.

Monetary Policy: Cyclic fluctuation(Reserve)

Deflation (downwar


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RBI sells securities from OpenMarket Bank buy => less money left. People can borrow less Low investment, expansion


RBI buys securities from Market

Banks sell to RBI => mor People can borrow more.

Monetary Policy: Cyclic fluctuation(OMO)

Deflation (downwar


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MCQ (2013)In context of Indian Economy, Open Market Operation refersto

1. Borrowing by scheduled banks from RBI2. Lending by commercial banks to industries and trade3. Purchase and sale of government securities by the RBI4. None of Above

(similar qs. In GS

1. Skip 2. Attempt 3. Mark n Review


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Policy rate=>increase Banks borrow less People borrow less Low investment, expansion


Policy rate=>decrease Expansion of credit.

Monetary Policy: Cyclic fluctuationDeflation (downwar


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Bank Rate When banks borrow long term funds from RBI. Theyve to pay this

much interest rate.

Bank rate= 9% Collateral: nothing. (no Government security.) Not the main tool to control money supply these days. LAF is the main tool.Why Bank rate? Linked with penal rates: If CRR, SLR not maintained. Penalty= (Bank rate + 3%); 5%


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LAF: Liquidity Adjustment Facility From 2000 Repo and Reverse Repo

Collateral? = Government security.

Short term loans.

Repo When banks borrow from RBI, they pay this muchinterest rate. 8%

Reverse

Repo

When banks deposit money in RBI, they earn this much

interest rate. 8-1=7%


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Repo (cannot use SLR securities)


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Marginal Standing Facility (can use SLRsecurities)


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LAF (Repo)

Minimum 5 cr All clients eligible1. Central & State Government2. Banks (commercial, regional

rural banks, cooperativebanks)

3. Non-banking financialinstitutions etc.

1 cr. Only scheduled commerc

banks can bid.

Whats the difference? MSF


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LAF (Repo)

Bank cannot use SLR quotasecurities No limit. Borrow according to

your securities. R%

Can use Maximum 2% NTDL.

R+1%

Whats the difference? MSF


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Reverse Repo Reverse repo rate = it is interest rate paid by RBI to its clien

short term loans. Central Government State Government Banks (commercial, regional rural banks, cooperative banks) Non-banking financial institutions.

Collateral: government securities

2011: RR = Repo 1% (100 basis points).28 th Jan 2014: Repo = 8%. Reverse repo =8-1=7%


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Policy rates=>increase Banks borrow less People borrow less Low investment, expansion Low employment Low income Low demand Low price level

Policy rates=>decrease Expansion of credit.

Monetary Policy: Cyclic fluctuationDeflation (downwar


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H d R ff ?


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How does Repo affects economy?

H d P li ff ?


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How does Policy rate affects economy?


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M t P li li it ti (D l i t i


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Monetary Policy: limitations (Developing-countries

1. People dont have many investment alternativCommercial banks have high deposits.

2. Unorganized money market; Shroff; financialinclusion

3. Monsoon uncertainty, cyclone, flood, draughts4. Crude oil, gold import5. Fiscal deficit; public borrowing6. subsidy leakage, Black money, underground

economy


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Repo: 7.75=>8% MSF: Repo + 1%: 9% Reverse Repo: Repo 1%=7% CRR: 4% SLR: 23% Policy review

Earlier 45 days 2 months x 6

WPI (-food fuel): increased. Tweve increased the repo rate.

Disinflationary path. Further tightening=unlikely. If inflation is reduced faster, we

reduce the rates.

CAD likely to reduce.

Monetary Policy: 28 th Jan

Time CAD as

2012-13 4.8

2013-14 2.5


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1. Reserve Ratios (CRR, SLR)2. OMO: Open market op.3. Policy rate=> inflation,

deflation



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Margin requirements / LTV Gold loan LTV: 60%=>75% Loans against Securities

(shares/bonds) Recession=> 65%=>85%

Selective/Direct

Monetary Policy: Qualitative=> Margin


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Ceiling on total loans in eachsector.

Planned economy PSL: 40% =>60%

Selective, Direct

Monetary Policy: Qualitative: Rationing


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Moral Suasion

Monetary Policy: QualitativeDirect Action


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1. OMO: Open market op.2. Reserve Ratios3. Policy Rate=> inflation,

deflation

1. Margin / LTV (Akshay)2. Consumer Credit /

Downpayment (Nano)3. Rationing (Stalin)4. Moral Suasion

5. Direct Action



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MCQ (2012)


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MCQ (2012)RBI Acts as bankers bank. This would imply which of the following?

1. Other banks retain their deposits with RBI

2. RBI lends funds to commercial banks in the times of need.3. RBI advises commercial banks on monetary matters.Correct StatementA. Only 2 and 3B. Only 1 and 2

C. Only 1 and 3D. 1, 2 and 3.


MCQ (2012)


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1. (CRR) Other banks retain their deposits with RBI.

2. RBI lends funds to commercial banks in the times of need.3. RBI advises commercial banks on monetary matters.Correct StatementA. Only 2 and 3B. Only 1 and 2



MCQ (2012)


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1. (CRR) Other banks retain their deposits with RBI.

2. (Repo ) RBI lends funds to commercial banks in the times of nee3. RBI advises commercial banks on monetary matters.Correct StatementA. Only 2 and 3B. Only 1 and 2



MCQ (2012)


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1. (CRR) Other banks retain their deposits with RBI.2. (Repo ) RBI lends funds to commercial banks in the times of nee3. (Moral Suasion) RBI advises commercial banks on monetary

matters.Correct StatementA. Only 2 and 3

B. Only 1 and 2C. Only 1 and 3D. 1, 2 and 3 (Test series A, Q75, Ans.D)



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Which of the following measures would result in an increase in themoney supply in economy? (2012)1. Purchase of government securities from public by central bank2. Deposit of currency in commercial banks by the public3. Borrowing by government from the central bank.4. Sale of government securities to the public by central bank.Answer choiceA. Only 1B. 2 and 4C. 1 and 3 (Test series A, Q77, Ans.C)D. 2, 3 and 41. Skip 2. Attempt 3. Mark n Review

h h f h f ll ld l h


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Which of the following measures would result in an increase in themoney supply in economy? (2012)1. Purchase of government securities from public by central bank2. Deposit of currency in commercial banks by the public3. Borrowing by government from the central bank.4. Sale of government securities to the public by central bank.Answer choiceA. Only 1

B. 2 and 4C. 1 and 3 (Test series A, Q77, Ans.C)D. 2, 3 and 4


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Mamata L4 P0 Monetary Policy